The Australian June half earnings reporting season is now complete with one in three companies missing expectations
Results have been okay with slightly less than normal upside surprise, but also less than normal downside surprise and an increase in the number of companies reporting profits or dividends up on a year ago compared to the December half reporting season but with both slightly weaker than normal. However, in aggregate results were softer than expected with earnings down 4.3% in the last financial year which was worse than consensus expectations for a 3.5% fall at the start of August.
Energy shares saw the biggest fall in earnings, but this was as expected with the downside surprise mainly concentrated in industrials, telcos and utilities. The signal from consumer stocks was mixed but not as bad as feared. The rise in the proportion of companies raising dividends is positive but outlook comments were more cautious and this along with the weaker than expected overall results for 2023-24 led to a downgrade in consensus earnings expectations for this financial year to a 4% rise from a 5.4% rise at the start of August. Despite the downgrade to aggregate earnings expectations, investors appear to be looking through it with hopes for relief ahead from eventually lower interest rates.
- 38% of results have surprised consensus earnings expectations on the upside, which is less than the norm of 40%, but on the other hand 34% have surprised on the downside which is also less than the norm of 41%. So not great, but okay.
- 55% of companies saw earnings rise on a year ago, and this is below the norm of 56%. But don’t forget that falls in the level of profits in 2023-24 were concentrated in energy stocks, which explains why more companies report profits up than down.
- 56% of companies have increased their dividends on a year ago, but this is also below the norm of 59%, suggesting caution.
Easing inflation pressures, central banks moving to cut rates and prospects for stronger growth in 2025-26 should make for reasonable investment returns over 2024-25. However, with a high risk of recession, poor valuations and significant geopolitical risks particularly around the US election, the next 12 months are likely to be more constrained and rougher compared to 2023-24 and there is a very high risk of a further correction in the near term.
A recession is the main threat for shares and there is a risk that we may have already seen the high for the year in the Australian share market after it reached our year-end target of 8100 in early August.
Bonds are likely to provide returns around running yield or a bit more, as inflation slows, and central banks cut rates.
Unlisted commercial property returns are likely to remain negative due to the lagged impact of high bond yields and working from home reducing office space demand.
Australian home prices are likely to see more constrained gains over the next 12 months as the supply shortfall remains, but still high interest rates constrain demand and unemployment rises. The delay in rate cuts and talk of rate hikes risks renewed falls in property prices as its likely to cause buyers to hold back and distressed listings to rise.
Cash and bank deposits are expected to provide returns of over 4%, reflecting the back up in interest rates.
A rising trend in the $A is likely taking it to $US0.70 over the next 12 months, due to a fall in the overvalued $US and a narrowing in the interest rate differential between the Fed and the RBA. A recession is the main downside risk.
Shane Oliver, Chief Economist AMP Capital
